The limited liability company can often shield individual members' assets in the event of a lawsuit against the company and other members or employees. The relative simplicity of starting and operating an LLC makes it an even more attractive business structure to small business owners. A single member LLC is just like a multi-member LLC, though with a few differences.
Multi-member LLCs enjoy the flexibility of choosing how to be taxed under the Internal Revenue Code. Members may choose pass-through taxation as a sole proprietorship, a partnership, a Subchapter S corporation or a Subchapter C corporation. As the Internal Revenue Code does not recognize LLCs, however, a single member LLC must file as a sole proprietorship or a corporation. Filing as a corporation requires filing Form 8832 to avoid tax treatment as a "disregarded entity."
Just because an LLC has only one member does not mean it has only one employee; LLC members are the people who own the business, not necessarily the ones who work for it. Any time an entrepreneur has employees, he runs the risk that one of them will do something that will create the potential for a lawsuit. Just like with multi-member LLCs, a single member LLC can protect the member's assets in the event of a lawsuit; however, a member can always be sued personally for the things he does himself, and ownership of an LLC is an asset that creditors and bankruptcy courts can take over and liquidate. As such, a single member LLC could lose all of its assets in the event of a lawsuit against a sole member.
Although forming an LLC is relatively simple and the limited liability shield can be valuable, organizing as an LLC may not make sense for every business. For one, under the laws of most states, a single member LLC dissolves upon the death of the member, so unlike a corporation, it will not be there for the member's heirs if she dies. Additionally, LLCs typically have more difficulty raising capital than corporations, and a single member will be unable to fund projects by issuing and selling stock.
While the absence of tax benefits to a sole member of an LLC does not eliminate the benefit of the limited liability shield, a sole proprietor who will be doing all of the LLC's work himself will enjoy no protection from lawsuits just because he is conducting LLC business. Company officers and employees are personally liable for their own acts; the purpose of the limited liability shield is to protect a member from liability for the acts of others. If the company has no other members and no employees, the documentation, filing and fee requirements associated with LLC creation and operation has no real benefit to the solo entrepreneur.